The Penn State scandal has dominated media headlines in recent weeks.  While the vast majority of the coverage has been directed toward the alleged criminal acts and potential cover-ups, there has been a fair amount of buzz surrounding Joe Paterno’s July 2011 transfer of his entire interest in his home to his wife for $1.  Many have speculated that Joe Paterno had no legitimate reason to transfer sole ownership of the house to his wife, and that he must be trying to shield assets from potential civil litigation.  While I will not speculate as to Joe Paterno’s rationale for making such a transfer, I believe it is incorrect to take the position that there is no legitimate reason for doing so.  In many instances, spouses can reduce their potential estate tax burden by making inter-spousal transfers of assets.

The following is a simple example of how an inter-spousal transfer can

The current low interest rate environment provides excellent opportunities to transfer wealth to family members.   One approach commonly used to accomplish this goal is to sell assets to an intentionally defective irrevocable trust (“IDIT”).  An IDIT is an irrevocable trust for the benefit of someone other than the creator of the trust (the “Settlor”), perhaps Settlor’s descendants.  However, the “intentionally defective” component of the IDIT means that, for income tax purposes, the assets in the trust will continue to be treated as owned by Settlor.  Thus, Settlor’s sale of assets to the IDIT will not result in income tax consequences.   Additionally, Settlor’s payment of income taxes on the income earned by the IDIT provides an additional means of reducing Settlor’s taxable estate, while allowing the benefits of the income earned by the IDIT to benefit Settlor’s descendants.

Typically, Settlor will take back a promissory note for the assets